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Are Stagnant Wages Really a Problem?

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The previous post by LorenCobb comments on the "American Crisis of the Middle Class" and provides the following statistics on stagnating wages: "Median male wage income was a little over $33,000 in 1969 and, adjusted for inflation, stayed stagnant with minor ups and downs to be about $32,000 in 2010.

I have seen similar numbers quoted frequently and the authors all seem to imply that such "stagnant wages" are a major problem. Certainly at first glance it sounds depressing that median wages (when adjusted for inflation) have not grown for 30 years. But I always have this nagging question whenever I hear this stat: "why is it bad?" In 1969, the United States was by most measures the wealthiest and most prosperous nation on earth, with perhaps the highest standard of living. The above statistic implies that over a 30 year period the median wage earner has maintained his purchasing power despite inflation. Hence, the average American has retained his ability to enjoy an incredibly high standard of living (compared with the rest of the world) for three decades - despite the major wage pressures created by globalization over that period.

In these discussions, is it really the starting premise that wages should indefinitely continue to rise beyond the rate of inflation? How can that type of exponential growth be expected to continue forever? To me, that creates the same theoretical problems seen in other exponential growth situations such as populations or money supply. In most systems, be they biological or financial, exponential growth cannot last forever and eventually a steady state must be achieved or a systemic collapse will occur. Now, in this era of globalization, I would expect individuals in poorer countries to continue with wage growth in excess of inflation until their standard of living is roughly on par with the first world nations. At that point, labor would be compensated equally across the globe and a "steady state" would be achieved. Of course, the alternate path to that "steady state" is declining wages and standards of living in the US (and other prosperous nations). Given those two paths, merely having stagnant wages in the US seems like a good outcome.

The next problem often identified as being caused by "stagnant wages" has been the requirement of the average wage earner to take on increasing amounts of debt to maintain their standard of living. But is that really the case? I would argue that the "standard of living" has actually increased over the last 30 years. The average square footage of homes has increased by about 20%; a standard car of 1970 pales in comparison to a 2010 model; computers, HD TVs, cell phones, high speed internet, and cable TV are common in many/most households. Clearly our standard of living has increased ,and it is that increase that has required the average wage earner to become so indebted. So. this of course brings up my next question: "can we really expect our standard of living to increase forever?". Once again, it seems as though a "steady state" must be obtained; hence, either poorer nations will increase their standard of living or ours will decline. But, until the rest of the world starts to catch up, I don't see how it is realistic (again in the context of globalization) to expect our standard of living to continually increase. What would be so tragic with the average US wage earner owning a smaller home (large by international standards), driving a car for more than 5 years, choosing between a smart phone or cable TV, staying out of debt, and enjoying the same standard of living (amongst the highest in the world) that his parents did?

Certainly at first glance it sounds depressing that median wages (when adjusted for inflation) have not grown for 30 years. But I always have this nagging question whenever I hear this stat: "why is it bad?"

I suppose it depends on what class you are in. Top 1% are clicking their heels.

I could really right a 20,000 word essay quite easily on this and not do it justice, but i'll try to hit a few talking points and hopefully come up with something coherent.

You have discovered what is probably the most important flag for our economy's doom.

1) The stagnation of wages - Imagine an economy where inflation is at zero and prices are stable and you are a maker of widgets. As you continue to make widgets, you get better at it. You gain technology and you gain efficiency. In a perfect world you make more widgets for the same cost. Your widgets are cheaper for others to buy and they have the same amount to spend on them as they had before your productivity increase. The widgets are therefore cheaper and the supply/demand curve suggests that people will demand more of them since they are less expensive to buy. To keep up with the extra demand you hire more employees at the same set wage. Because more people are employed, they are less dependent on the government. The government therefore gets more revenue from the people that are employed and spends less money on the people that are unemployed. This scenario is only complicated by inflation. I'll explain below.

2) In steps government - Some of the most prevelant economic theories depend on a sane government to be an economic compass. The government needs to spend when times are hard and be thrifty when times are booming. I totally disagree with those theories and believe that markets are more effective without government control, but even if they were true, our democratic system ensures that no politician will ever be thrifty. Politicians are re-elected by promising everything to everyone. When a government spends more than it can collect, it borrows or prints the rest and that results in inflation.

3) The inflation trap - So when government increases spending beyond it's means it also creates inflation.This increases prices and the supply/demand curve dictates that less people want your widgets. You still have the productivity increase, but lower demand means that you lay people off instead of hiring them. Higher prices also dictate that you have to pay your employees more to keep up with their standard of living. Your productivity gains are eroded by higher labor costs. This is a heavy price to pay when less people want your widgets.

4) Here comes government again - Companies everywhere are now laying people off due to inflation, and since politicians like to be re-elected, they pledge their support to the unemployed. Government spending increases even more as revenues drop. Inflation hits even harder. The cycle continues.

5) The savers get destroyed - Your employee is his own little widget factory. He tries to increase both his own productivity and his own profit. He has a finite working life, so he tries to build up a nest-egg for when he retires. Since wages trail inflation, he has an uphill battle with inflation. Once he has completed his nest-egg, he lives off a fixed income. Inflation at this point has devastating effects.Your retired employee can't respond with more income. He can only respond with less spending.

6) The theft of productivity - The whole purpose of this is an attempt to try to explain how productivity gets eaten by a goverment that promises everything to everyone. They bribe you with your own money so you can re-elect them so they can get bribed once again with special interest money. I would start another talking point about corporate welfare, but it should be obvious by now on how that increases inflation and hurts the economy.

7) The true burden of inflation - Aside from the following things; The erosion of productivity, The weakening of the demand curve, the negative effect on the government balance sheet, the delay of wages catching up with inflation, the decline of the standard of living of retirees, the theft of productivity, the erosion of savings, the draining from the system for corporate welfare, it might have some virtue that I haven't discovered.

If you were a homeless person with absolutely nothing, coming to me for investment advice, the absolute first statement that you would hear from me would be "live within your means." This applies to governments too. Debt is slavery. An irresponsible government not only steals our productivity, it relies on our kids to pay the interest.

I apologise for making this post sound so dark, but for decades I've seen the same downward spiral. Even here, when we look worse than normal at this point and time, I see posts by the ruling party that making a trillion dollar coin is the responsible thing to do. Responsibilty is still living within your means. I'm not sure I have ever met a responsible politician.

Ok now to the short answer. A stagnated wage, would be a good thing in a productive, non-inflated economy.